Mobile employees present companies with a challenge to ensure their corporate tax position is reviewed and aligned with the mobility arrangement. Not only can a mobile employee have an impact on corporate tax obligations, but the corporate tax position may have an impact on the individual taxation of the mobile employee. Given corporate tax and global mobility are often separate teams, it is important to have frequent communication between the teams to share the information needed for a successful mobility strategy.
Key areas of focus for Global Mobility and Corporate Tax working together
Ensuring the lines of communication are open between the global mobility and corporate tax teams will allow the organization to reduce risk and ensure compliance. The following provides several key areas of focus.
Considering permanent establishment for the organization
If your company were to set up an actual office or factory in another country, it would likely not come as a surprise if it was determined that this physical presence resulted in a taxable presence or “permanent establishment” (PE) for your organization in that country. However, a PE can be established even if there is no physical office space or building. Under many income tax treaties, a PE can also be created based on the activities or ongoing presence of mobile employees. Examples of employee-related actions that may lead to a corporate PE include:
- The employee has sufficient authority to bind their Home country employer in the business activity in the Host location. In other words, the employee has the authority to conclude contracts in the Host location on behalf of the Home country employer or is substantially involved in the contract negotiations.
- One or more mobile employees provide services in the Host location on the same or connected projects that exceed defined time thresholds. For example, a deemed PE can apply in Canada if one or more employees of a US company are sent to work on a single or connected projects for, in aggregate, 183 days or more in any 12-month period.
If a PE is triggered, the implication for the company is that a portion of the company’s income would be subject to corporate tax in the Host country. Note that through appropriate transfer pricing, the company may be able to get a deduction and minimize tax.
Once established, the company’s taxable presence may also impact the tax position for your mobile employees. If the company has a PE in the Host country, application of an income tax treaty at the individual level will generally not apply. This will have an impact on your mobile employee as they will be liable for income tax in the Host country. Additional obligations for the company may also arise such as payroll reporting and compliance obligations for the individual in the Host country.
As such, it is important to provide awareness to the corporate tax team for purposes of determining potential PE issues due to the presence of mobile employees. It is also important for the corporate tax team to provide insight to the global mobility team on countries where a PE already exists.
Understanding and being in a position to handle compliance requirements in a new country
Sending employees to a country where there is not an established entity can provide a number of challenges. These could include immigration, tax, and employment law obligations. For example, certain visa categories could require the sponsorship of a local employer. From a tax perspective, your organization may need to find a third-party to assist with any local payroll reporting and withholding obligations. A local entity may be required to meet Host country regulatory obligations.
Involving your corporate tax team early in the process when sending employees to a new location can assist in identifying potential compliance obligations and solutions.
Ensuring correct documentation is reviewed and in place
It is crucial to have appropriate documentation in place ahead of sending a mobile employee to a Host country. This helps limit exposure for the company and the employee. In addition, documentation may be required to facilitate immigration compliance, to support tax planning and payroll compliance, and to meet local employment law requirements. Important documentation includes:
- Assignment policies. These policies will include an outline of the general types of compensation, benefits, and allowances that will apply to defined groups of mobile employees. It is important that any polices are reviewed and appropriate from a legal and company risk perspective for both Home and Host country purposes.
- Tax reimbursement policies. It is important to identify what type of company tax support will be provided for specific types of mobile employees (e.g., tax equalization, limited tax gross-ups, no support).
- Assignment letter. This letter reflects the agreement between the company and employee. Key areas for documentation include:
- Anticipated assignment duration
- Outline of specific compensation, benefits, and allowance amounts
- Identification of the assignment and tax reimbursement policies that will apply
- Specification of employee responsibilities or other key terms and agreements
- Inter-company agreement (often referred to as a “secondment agreement”). This agreement outlines how the Home and Host companies will handle various costs and administrative requirements for the scenario. This agreement often defines the role of the mobile employee to limit the possibility that their activities will create a PE for the Home country employer in the Host location.
- Employment contracts. As required under the Home and/or Host country’s local law.
- Payroll documentation. For example, forms to reduce or eliminate withholding requirements.
This documentation should be shared and reviewed between the global mobility and corporate tax teams ahead of sending an employee to the Host country.
Coordination of tax planning opportunities
Timing and information sharing are critical, and the planning process should start early. Tax planning opportunities impact the cost of the assignment and the key areas of focus addressed above will play a major role in tax planning.
For example, a secondment agreement is essentially a lease of the employee by the Home company to the Host company. This usually requires the Host company to reimburse the Home company for all compensation costs. Although a secondment agreement can minimize PE risks, it prohibits the employee from qualifying for tax treaty relief in the Host country. In many circumstances, this will cause the cost of the assignment to increase. As such, the company needs to evaluate the PE risk of not creating a secondment agreement versus the compliance and tax costs of an individual not qualifying for tax treaty relief. This will require the global mobility and corporate tax teams to be in communication to ensure these planning opportunities are reviewed and addressed.
Tips for working together
Having early engagement between the corporate tax and global mobility team as well as having discussions often, will help your organization reduce risk and ensure compliance and will allow for a successful mobility strategy.
Keep in mind that the global mobility and corporate tax teams likely have different goals they are trying to find solutions for. The global mobility team is trying to get top talent to a specific country while the corporate tax team is concerned about corporate reporting and the tax costs, risks, and administrative ramifications of the arrangement. Engage with your mobility tax services provider to help. Due to their expertise and experience with global tax issues, they can facilitate discussions between the two teams. This includes explaining the individual tax implications, company payroll and withholding compliance obligations, and the corporate tax considerations.
At GTN, we facilitate these conversations for many of our clients. Due to the experience of our team members, we not only explain and help address the tax implications and compliance obligations, but we are also able to help close the disconnect between the global mobility and corporate tax and teams and assist in identifying solutions to fulfil the goals of both teams.
The information provided in this article is for general guidance only and should not be utilized in lieu of obtaining professional tax and/or legal advice.
Author: Tracy Novotny, Director
Tracy is a Director in GTN’s West Central region. She has over 14 years of experience in global mobility and is recognized by her clients for her focus on customer experience and an ability to explain complex tax matters in an understandable and actionable manner. She is a frequent writer and speaker on mobility tax topics, including cross-border and domestic payroll, delinquent filings, and business travelers.
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